The Lending Decision Process is designed to teach the analytical and decision-making techniques needed to make sound credit decisions using financial accounting, financial statement analysis and cash flow analysis.
The six parts of The Lending Decision Process will provide learners with a foundation in the following areas of study: Business and industry risk analysis, Management assessment, Financial accounting, Balance sheet and income statement analyses, Ratio trend analysis, Cash cycle and seasonality analysis, Borrowing causes and repayment source assessment, Cash flow analysis and Using financial projections
Series 1: Series 1: Industry, Management and Economic Influences
The purpose of this course is to teach students to interpret repayment risks related to industry, economic, market and management influences. In order for the course to be considered completed all exercises in each course module must be completed
After completing this course, students will be able to:
• Analyze the competitive forces in an industry
• Determine key success factors in the company’s industry
• Explain the stages of the general business cycle and the impact economic cycles and conditions can have on different businesses
• Describe the financial behavior of industries, products and companies throughout their life cycles
• Connect a company’s industry, business and product life cycles to their related financing needs
• Prepare a company overview of its products and services, customers, suppliers, facilities, management, ownership and company history
• Appraise the company’s likelihood of success, considering prior risk mitigation, competitive advantages, management qualifications and effectiveness of business strategies
• Appraise the depth and breadth of management skill, experience and organization
Series 2: Interpreting Quality of Financial Reports and Accounts
In this series, Trainees will interpret risks stemming from the quality of financial reports and underlying financial accounts.
After completing this course, students will be able to:
• Analyze the reliability of accountant prepared financial statements.
• Compare and contrast the differences among cash, modified-cash, and tax-basis accounting methods.
• Interpret repayment risks stemming from identified financial reporting issues.
• Assess the implication of estimates permitted by GAAP.
• Identify the characteristics of a company’s assets, liabilities, and net worth accounts.
• Determine the integrity of a company’s reported financial condition based on a review of both on- and off-balance sheet accounts.
• Identify the characteristics of a company’s income and expense accounts.
• Analyze the quality of a company’s earnings, the consistency and authenticity of its income and expense accounts, and the sustainability of revenues.
Series 3: Analyzing the Company’s Financial Performance and Condition
In this series, Trainees will interpret repayment risks suggested by the company’s historical financial performance and financial condition.
After completing this course, students will be able to:
• Apply financial statement spreading techniques to reclassify accounts and provide details needed to prepare financial statements for credit analysis
• Convert financial statements to a format that expresses accounts as percentages of total sales of or total assets
• Compute a company’s liquidity using various ratios
• Analyze a company’s ability to meet its short- term obligations
• Determine how a company’s industry sector influences it financial statement characteristics
• Compute a company’s leverage using various ratios
• Analyze a company’s ability to meet its long-term obligations
• Determine how a company’s industry sector influences it financial statement characteristics
• Calculate and analyze a company’s profit margins
• Perform a trend analysis on a company’s profitability
• Compare a company’s profitability with industry composites
• Compute and analyze a company’s productivity ratios
• Compare a company’s productivity trends with industry composites
• Compute and analyze a company’s efficiency ratios
• Compare a company’s efficiency trends with industry composites
Series 4: The Cash Cycle, Seasonality & Discovering Borrowing Causes & Repayment Sources
In this series, Trainees will examine a company’s cash cycle and seasonal characteristics. They will interpret both short- and long-term borrowing causes and repayment sources.
After completing this course, students will be able to:
• Identify and measure cash cycles using days’ sales in receivables and days’ COGS in inventory and accounts payable.
• Identify the benefits and limitations of cash cycle analysis
• Determine variations in cash cycles by type of business
• Determine the effects of seasonality of business operations on the cash cycle.
• Interpret budgets of cash receipts and disbursements to estimate the amount and duration of seasonal borrowing needs.
• Identify the benefits and limitations of analyzing interim financial statements.
• Differentiate between seasonal and permanent asset and liability levels.
• Identify borrowing causes including sales growth, change in asset efficiency, change in trade credit, fixed asset expenditures, and change in net worth
• Determine repayment sources that are appropriate matches to each borrowing cause
Series 5: Analyzing Cash Flow Statements to Measure Long-Term Repayment Ability
In this series, Trainees will analyze cash flow statements to distinguish between profit and cash flow. They will use cash flow statements and traditional debt service coverage measures to interpret cash flow repayment risks.
After completing this course, students will be able to:
• Compare and contrast the three Cash Flow Statement formats in order to understand how the company generates and uses cash flow.
• Define the three types of cash flow to determine how business events are reflected on the Cash Flow Statement.
• Compare accrual and cash-based financial statements in order to differentiate between cash and non-cash events.
• Convert an accrual based statement to a cash-basis presentation to isolate cash generation or contraction
• Determine cash flow to repay debt by answering four key questions
• Evaluate cash flow quality using three tests
• Rank cash flow quality based on the ability to repay debt
• Identify and predict the demands on cash that might compromise loan repayment
• Calculate and interpret profit-based debt service coverage ratios
• Identify the benefits and limitations of profit-based debt service coverage ratios
• Calculate and interpret UCA cash flow-based debt service coverage ratios
• Outline the benefits and limitations of UCA cash flow-based debt service coverage
Series 6: Using Financial Projections to Fine Tune the Credit Analysis
In this series, Trainees will construct and analyze financial projections to interpret future ability to repay debt, identify the most appropriate type of loan, and to evaluate margins of protection in the event of changes in business, industry, or management risks.
After completing this course, students will be able to:
• Explain the benefits of using financial projections in a credit analysis
• Prepare a pro forma monthly balance sheet to evaluate peak borrowing needs based on a company’s cash budget and projected monthly income statements
• Prepare an annual financial projection
• Interpret the ability to repay debt given assumptions about cash flow drivers and other variables
• Interpret loan types based on projected borrowing needs and repayment sources
• Determine an appropriate repayment schedule for long-term loans
